Remembering Bill Niskanen: Pursuing Economics as a Public Science in
the Service of Liberty
Richard E. Wagner
Department of Economics, 3G4
George Mason University
Fairfax, VA 22030
tel.: ++1-703-993-1132
fax: ++1-703-993-1133
rwagner@gmu.edu
http://mason.gmu.edu/~rwagner
Abstract
This short essay is a memorial piece about William A. Niskanen (13 March 1933
– 26 October 2011). The essay starts with his time at the University of Chicago in
the mid-1950s, and gives most attention to his contributions to public choice.
Especial attention is paid to his Bureaucracy and Representative Government,
which opened vast territory for subsequent analytical exploration. A good deal of
attention is also paid to his Autocratic, Democratic, and Optimal Government
because this work both conveys his interest in comparative constitutional
analysis and is useful for illustrating the strengths and weaknesses of his
approach to this material.
Keywords: William Niskanen; bureaucracy; constitutional economics; welfare
economics; public choice; economics as public science
JEL Codes: B32, D23, D61, D73
1
Remembering Bill Niskanen: Pursuing Economics as a Public Science in
the Service of Liberty
William A. (Bill) Niskanen (13 March 1933 – 26 October 2011) will be well
known to readers of Public Choice. His Bureaucracy and Representative
Government (Niskanen 1971) was a major contribution in the earliest days of
public choice, coming only three years after public choice acquired its name.
That book was followed by a lengthy stream of books and papers throughout his
life. Bill was also President of the Public Choice Society during 1998-2000. One
cannot work in public choice without coming across Bill Niskanen, and
repeatedly.
1. Chicago Beginning and Foundation
While Bill did his undergraduate work at Harvard, graduating in 1954, it
was at Chicago where he studied until 1957 before moving to RAND that his
intellectual orientation took shape. Chicago at this time was strongly personified
by Milton Friedman and Arnold Harberger, recognizing that numerous other
notable personages were also present. Yet among figures strongly associated
with Chicago-style economics during the 1950s, Frank Knight had retired in 1955
and George Stigler did not arrive until 1958. Bill’s instantiation of Chicago-style
economics throughout the corpus of his work can be traced directly to Friedman
and Harberger. It was with Harberger that Bill wrote his doctoral dissertation on
the demand for alcoholic beverages, having warmed up for the task by writing a
Master’s thesis on the demand for cigarettes.
2
Niskanen embraced two traits common to Friedman and Harberger: (1) a
belief that the theory of competitive equilibrium provides a good analytical
window through which to view the world and (2) good economic models should
be simple and parsimonious and yet have rich empirical content. These qualities
exemplified Chicago-style economics during Bill’s time there and stood in stark
contrast to economics as practiced in most other places, where imperfect
competition and market failure predominated. The simple and parsimonious
character of economic models played out against a background of robustly
competitive markets is evidenced crisply in Friedman (1962), which was
compiled from class notes several students took during the 1950s. The belief that
actual markets are best captured by the theory of competition and not by models
of monopoly or imperfect competition is the central theme of Harberger (1954),
which argued that the loss from monopoly was only one-tenth of one percent of
GDP. While he wasn’t at Chicago during Bill’s time there, George Stigler (1949)
likewise expressed that Chicago theme in debunking monopolistic competition
and asserting the superiority of the competitive model. In the same vein, Warren
Nutter (1951), another Chicago product, argued that enterprise monopoly was
vanishingly small in the United States over the 1899-1939 period. Niskanen’s
conceptual framework was centered on competitive markets as both useful for its
simplicity and as descriptively accurate.
Yet Bill wanted to bring government into this analytical framework, as, of
course, did Harberger. The common vehicle for doing this at the time was welfare
economics. To this day welfare economics is oriented around the so-called two
3
theorems. The first theorem states that competitive allocations are Pareto
efficient. The second theorem states that selections among competitive
allocations can be made in non-distortive fashion through lump sum taxes and
transfers. The two theorems together have provided a recipe for governmental
intervention for most welfare theorists. By claiming that reality is always and
invariably imperfectly competitive, market allocations are never Pareto efficient.
Hence, there will always exist in principle some intervention that can secure
Pareto efficiency even if life is not so simple in practice. Welfare economics was
thus mostly viewed as a systematic framework for advocating progressivist
principles of state direction of economic activity by articulating the ubiquitous
presence of market failure.
In several works, Harberger stood athwart this use of welfare economics,
and with this alternative tack summarized in Harberger (1971). There is nothing
of which I am aware in Niskanen’s body of work that is contrary to Harberger’s
claim that welfare economics should be based on a postulate of competitive
equilibrium. In the hands of market failure theorists, the second theorem provided
the vehicle by which those theorists could claim societal improvement for their
proposals. These efforts envisioned economic policy as being in the hands of an
elite few who could be counted upon to do the right thing as established by their
formulations of welfare economics. Niskanen took the nascent public choice
theorizing and converted the second theorem from offering normative guidance
to some benevolent despot into a positive statement of actual political processes.
4
As typically presented by people who work with welfare economics, the
selection among possible competitive equilibriums is the province of rational
thought among economic philosophers regarding principles of justice and equity.
Bill recognized the multiplicity of possible societal equilibriums but he most
certainly did not regard reasoned and disinterested discussion among
philosophical types as the situs where one equilibrium allocation replaces
another. In this respect Bill was surely closer to Pareto (1935) in regarding such
formulations as ideological cover for the realities of the use of power. No one has
ever claimed to want to hold political power to do harm; even Adolf Hitler and
Joseph Stalin claimed they were seeking to do good work in the world. Vincent
Ostrom (1997) notes that the use of power is a Faustian bargain where people
use instruments of evil in what they claim is the service of the good. The
historical record shows numerous tradeoffs of good and evil, and Niskanen
(2003) was one effort to illuminate this tradeoff across regimes.
In contributing mightily to the public choice revolution, Niskanen
recognized that the world runs more on intense desires than on pleasant
thoughts. Pareto recognized that good ideology could get people to support
programs they would oppose if they were to think the matter through. But most
people had neither the time nor the inclination to do that. Among other things,
there would be no direct return from any such effort. Dispersing the ideological
fog spread by political candidates and associated interest groups is a task of
great public significance, the performance of which requires some posture of
independence and detachment. Bill’s early years were perhaps years of warming
5
up for that task, which he subsequently performed with dedication and passion
after joining the Cato Institute in 1985.
2. Liberty and the Public Significance of Economic Science
James Buchanan (1996) explains that economics is a science with
considerable public significance because its teachings touch heavily upon the
qualities of the structured personal interactions through which societies are
constituted. This vision of economics, which has shone through many of
Buchanan’s writings, and which has been elaborated by Peter Boettke (2011),
has been a significant part of Niskanen’s professional work. This public quality of
economics does not mean that economic scholarship must always be aimed at
some general, non-professional audience. It means only that the subject matter
with which economics deals touches upon matters that are or should be of
interest to people in general. Scholarship reflects a structure of production where,
within the division of intellectual labor, some people focus their efforts on
deepening the understanding of scholars about their subject matter while other
people explain the significance of those formulations to a broader audience.
Buchanan, for instance, made little effort at direct public communication
throughout his career. In contrast, Niskanen aimed mostly to reach that broader
audience though he also developed some significant conceptual formulations.
Bill’s career illustrates both his dominant concern with pursuing economics
as a public science in the service of liberty and his ability to bridge the two
domains of theoretical inquiry and topics of interest to a broader public. He spent
6
only four years in universities, three at Berkeley (1972-75) and one at UCLA
(1980-1981). He left Berkley to join Ford Motor Company, moved to UCLA after
leaving Ford, and left UCLA to join President Reagan’s Council of Economic
Advisers, leaving four years later to join the Cato Institute in 1985, where he
stayed the rest of his life. The bulk of Niskanen’s life was spent in organizations
where his primary activity was to render economic theories intelligible to
audiences more interested in implications that could be derived from those
theories than in the theories themselves. In this activity Bill was a master, as
interested readers can discern by perusing his many works in this genre, a good
number of which are available from the Cato Institute.
To speak of economics as a science with public significance leaves open
the kind of economic science that addresses that public significance. Economics
is a contested discipline, as Reder (1999) explains. In this vein, postwar
economics at Chicago asserted the superiority of the competitive model over
claims of imperfect competition, as one illustration of this contested quality of
economics. Another line of controversy concerns whether economics should
posit closed, equilibrated systems as the object of analysis or open and kaleidic
systems. In this respect, Wagner (2010) argues that economic theory requires
both types of theoretical framework: a closed framework captures social features
that are invariant across time and space while an open framework captures the
internally generated turbulence that is also a quality of societies.
It has often been noted that eternal vigilance is the price of liberty. Liberty
is not the natural condition of humanity. It is rather an artifact that can be
7
secured, if indeed it can ever be said truly to be secured, through the application
of eternal vigilance to guard against the collectivisms that appear in many guises.
Bill recognized that at base there are only two principles for societal organization:
liberalism and collectivism. Either people govern themselves and societies are
polycentric arrangements among self-governing entities, or some people are
governed by others and societies are characterized in monocentric and
hierarchical ways, as illustrated by such status relationships as superior-inferior,
dominant-subordinate, or regulator-regulated. Bill was a creative and tireless
warrior in the never-ending battle to expand the scope of liberal principles over
the continual incursion of collectivist principles that come from many directions,
including business corporations, as illustrated by Bill’s widely noted dismissal
from Ford for failing to advocate protection from foreign competition for Ford.
Economic theory can be pursued from two directions, which Wagner
(2010) describes as outside-in and inside-out. Outside-in is the customary
direction. It is the direction characterized by the theory of competitive equilibrium
that Bill embraced during his student days. It locates the observer outside the
object being observed. What is observed is some equilibrium configuration, and
existing public policies, along with changes in technologies or preferences, are
means of shifting societies to different equilibriums. The inside-out direction of
theorizing seeks to locate the theorist inside the object being theorized about.
What are observed in this case are not placid equilibriums but processes of
continual contestation and turbulence where each observed instant is but a
snapshot of a continuing historical process. From the outside-in perspective,
8
property rights might be characterized by the image of lines in the sand which
form maps of allowable action open to the various members of a society. The
economic theory of free competition examines the features of society in the
presence of some such set of lines in the sand. In contrast, from the inside-out
perspective those lines are continually being challenged and moved through
contests within societies whose qualities are forged and modified through such
contestation. In this instance, a particular line stays where it is because those
who want to shift it cannot overcome resistance from those who want to keep it
where it is, or possibly even move it elsewhere.
Bill’s early years were forged dealing with military issues. He worked at
RAND during 1957-1962, at the Department of Defense during 1962-1964, and
the Institute for Defense Analysis during 1964-1970 before joining the Office of
Management and Budget for a two-year stint. Bill recognized that societies had
motion, but true to his Chicago foundation insisted that simple models grounded
in competitive equilibrium could allow empirically useful conclusions to be
derived. Bill bridged two worlds in helping to supply the eternal vigilance that is a
necessary condition for being able to live in liberty.
Niskanen (1971) is the work that Bill is most widely known for among
public choice scholars. That book reflected a conceptual architecture that he
employed throughout his professional work: simple models grounded on
competitive equilibrium under different institutional conditions are used to
generate significant empirical implications. In Bureaucracy and Representative
Government, Bill treated bureaus as being able to face their legislative sponsors
9
with all-or-nothing offers, thereby transforming consumer surplus into supracompetitive output under the presumption that the desires of bureau officials
were promoted in direct proportion to the sizes of their budgets. Under certain
conditions this generated the striking empirical implication that bureau output
would be twice the competitive output. Almost immediately, Bill’s formulation
came under strenuous criticism, as illustrated by Earl Thompson (1973) and
Jean-Luc Migué and Gerard Bélanger (1974), the latter of whom advanced
maximizing the discretionary component of a bureau’s budget in place of
Niskanen’s model of maximizing output.
These critics pointed to the implausibility of Bill’s presumption that bureau
officials had the ability to advance all-or-nothing offers to legislative sponsors. In
consequence, the literature shifted to a deeper consideration of knowledge and
monitoring in the relation between bureaus and their legislative sponsors. While
Niskanen’s original framework has been abandoned in light of subsequent
examination, his central theme regarding the unique problems regarding
knowledge and incentive that pertain to bureaus and their legislative sponsors
remains strongly in play in contemporary public choice. Niskanen (1975) is an
early reconsideration of his formulation in light of the original criticisms while
Niskanen (2001: 258-270) provides a later review of that literature. While Bill’s
original formulation of output maximization has given way to other models, Bill’s
original formulation set in motion the scholarly activity that subsequently
demolished any rote application of public interest theory to bureau activity, at
least without running those theories through ancillary arguments grounded in
10
claims about the knowledge and incentives possessed by the relevant
participants.
A recurring theme in Bill’s work has been the constitutional arrangements
of good government and the many ways in which those arrangements can be
eroded. Niskanen (2003) brings Bill’s interest in using simple models to generate
empirical implications to bear on a comparison of constitutional frameworks. In
my judgment, this book illustrates nicely both the virtues and the vices of Bill’s
approach to his material. The subject he treated there was the economic
properties of different constitutional arrangements. This was a work in
comparative constitutional systems, approached from within the analytical
framework the Bill chose to embrace from his student days: a simple model
capable of generating specific implications about the equilibrium properties of
different constitutional regimes. He starts by positing three types of constitutional
frameworks, which he labels autocratic, democratic, and optimal government. He
recognizes that there can be variation among instances of each category, but
dismisses such variation as second-order considerations that he didn’t want to let
obscure his focus on what he regarded as the first-order differences.
To develop specific empirical implications, Bill adapted a new Classical
macro framework to his interest in comparative constitutional analysis. True to
orthodox macro theory, this framework involved making statements about macro
entities without being concerned about how those macro entities might have
been generated through interaction among micro-level entities. Bill performed his
analysis as an exercise in comparative statics with respect to three different
11
equilibriums. Following standard macro theory, he posited a common CobbDouglas production function where some natural level of aggregate output was
modified by taxes and spending, in contrast to macro models where a natural
rate of employment is modified by monetary shocks. Within Bill’s framework,
natural output is independent of regime, which is a necessary presumption for
the application of comparative statics across regimes. Similar to real business
cycle theorizing, Bill calibrated his model with US data for 1966. Within this
aggregative framework, the difference among regimes arose from the different
maximization problems which led to different budgetary policies that were applied
to the common aggregate production function. Bill defined an autocratic
government as one that maximizes the difference between the revenue it
extracts from the population and its expenditures on public services; an
autocratic regime is treated as maximizing net worth for a ruling clique. Facing
the same production function, a democratic regime maximizes the net disposable
income of the median voter, which in Bill’s framework is the person with the
median income. In contrast, an optimal government is one that maximizes
average disposable income.
What results from Bill’s application of this framework has a reasonable
quality while also being disturbing in the quiescent posture it portends. With
regard to his comparative statics, the democratic regime generates aggregate
income that is about 85% of what an optimal regime would generate. In contrast,
an autocratic regime generates only about 55% of what an optimal regime would
generate. These results have plausibility behind them, in that it’s easy to point to
12
migration patterns that generally run from autocratic to democratic regimes. It’s
also easy to recognize that democratic regimes contain room for improvement.
What I find disturbing about this formulation is the quiescent or complacent
quality that it counsels: democratic regimes always have some room for
improvement, but on the whole they are pretty good and, moreover, must always
be so because his framework has no room for internally generated
metamorphosis.
Yet in earlier work (Niskanen 1977), Bill cited favorably the 18th century
Scot historian Alexander Tytler to the effect that democracy was transitory and
not permanent due to the clash between the private property necessary for liberty
and the collective commons that democracy creates by converting private
property into political property. At other places in Niskanen (2003), Bill speaks of
constitutional drift and erosion, as well as citing Tytler again and also de
Tocqueville on democratic despotism. In doing this, however, Bill is speaking
outside the framework of his model, for his model has no space for the
transformation from basically liberal to significantly collectivist regimes that has
been underway throughout the western world for a century or so.
3. A Personal Remembrance in Closing
I never saw Bill Niskanen on a day-to-day basis; we were never
colleagues, though once upon a time we could have been. Early in the spring
1966 semester, Bill gave the Friday afternoon seminar in Charlottesville. He
presented a model of guerilla warfare. It was one of the most memorable of the
13
seminars I recall from my three years there. It used a simple framework to derive
interesting implications. This was job-market season. The next morning Bill
interviewed me and offered me a position at the Institute for Defense Analysis.
After some reflection, I realized that I wanted to lead the life of a professor more
than I wanted the added pay, so declined his offer. Over the years I imagine we
were together on average about one occasion per year. Sometimes this would be
for a few hours at a seminar or dinner; sometimes it would be for a few days at a
conference. There were also such sporadic occasions as spending time in
airports or sharing taxis. So this remembrance is written as an outsider and not
as an insider: it entails my sense of Bill when seen from a distance and not up
close on a continual basis.
If the rules established by the Marquis of Queensbury applied to scholars
as they do to boxers, Bill would have been exemplary in his embodiment of those
rules. He was a gentleman who was faithful to his calling as a scholar who saw
economic science as being in the forefront of the eternal struggle for liberty and
liberalism over the persistent forces of collectivism. He would listen politely in all
cases, and then tell you his honest reaction in an equally polite manner. He and I
didn’t always agree, but we always came away with an awareness of the source
of our disagreement. And often that disagreement was nothing more than a
disagreement about the tasks we were addressing. In my (Wagner 2004) review
of Niskanen (2003), for instance, I expressed uneasiness with the representative
agent quality of his effort to give an aggregate measure of the degree to which
actual democracies fall short of what he argued was an optimal outcome. Bill
14
didn’t disagree with me, but instead wished me well in coming up with superior
formulations. But until I did, he would stick with his parsimonious reductionism
based on simple models of competitive equilibrium.
In this posture I have no complaint even though I think many theoretical
lacunae remain to be explored in deepening our understanding about internally
generated turbulence within human societies. Two people walking north in
parallel on a globe will over short periods see no change in the distance between
them. Eventually, however, they will realize they are approaching one another.
Each of us lives but short periods in the life of the universe, and so might be
excused for thinking of social life as occurring on a plane when it really occurs on
a sphere. Bill, I know from experience, never objected to efforts to develop
alternative forms of explanation, for he had a deep commitment to liberal
principles and saw economics as a system of thought capable of bringing support
to those principles. Within the public forums within which he operated, however,
he recognized a need to advance empirical answers to questions that required
closed-form modeling if those questions were to take on life within those forums.
There are many paths along which to pursue the public significance of economic
science in the service of liberty, but whichever path a scholar might chose he or
she will find luminous inspiration in the life and work of Bill Niskanen.
15
References
Boettke, P. J. (2011). Teaching economics, appreciating spontaneous order,
and economics as a public science. Journal of Economic Behavior and
Organization 80: 265-74.
Buchanan, J. M. (1996). Economics as a public science.” In S. G. Medema
and W. J. Samuels, eds. How do economists do economics? Cheltenham,
UK: Edward Elgar, pp. 30-36.
Friedman, M. (1962). Price theory: a provisional text. Chicago: Aldine.
Harberger, A. C. (1954). Monopoly and resource allocation. American
Economic Review 44: 77-97.
Harberger, A. C. (1971). Three basic postulates for welfare economics.
Journal of Economic Perspectives 9: 785-97.
Migué, J-L. and Bélanger, G. (1974). Toward a general theory of managerial
discretion. Public Choice 17: 27-43.
Niskanen, W. A. (1968). The peculiar economics of bureaucracy. American
Economic Review, Papers and Proceedings 58: 293-305.
Niskanen, W. A. (1971). Bureaucracy and representative government.
Chicago: Aldine.
Niskanen, W. A. (1975). Bureaucrats and politicians. Journal of Law and
Economics 18: 617-43.
Niskanen, W. A. (1977). The prospect for liberal democracy.” In J. M.
Buchanan and R. E. Wagner, eds., Fiscal responsibility in constitutional
democracy. Leiden: Martinus Nijhoff, pp. 157-74.
Niskanen, W. A. (2001). Bureaucracy” In W. F. Shughart II and L. Razzolini, eds,
The Elgar companion to public choice. Cheltenham, UK: Edward Elgar,
pp. 258-70.
Niskanen, W. A. (2003). Autocratic, democratic, and optimal government.
Cheltenham, UK: Edward Elgar.
Niskanen, W. A. (2008). Reflections of a political economist: selected articles on
government policies and political processes. Washington, DC: Cato
Institute.
16
Nutter, G. W. (1951). The extent of enterprise monopoly in the United States:
1899-1939. Chicago: University of Chicago Press.
Ostrom, V. (1996). Faustian bargains. Constitutional Political Economy 7: 30308.
Pareto, V. (1935). The mind and society: a treatise on general sociology. New
York: Harcourt Brace.
Reder, M. W. (1999). Economics: the culture of a controversial science.
Chicago: University of Chicago Press.
Stigler, G. J. (1949). Five lectures on economic problems. London: Longmans,
Green.
Thompson, E. A. (1973). Review of Bureaucracy and Representative
Government, by William A. Niskanen. Journal of Economic Literature
11: 950-53.
Wagner, R. E. (2004). Review of Autocratic, Democratic, and Optimal
Government, by William A. Niskanen, Cato Journal 24: 181-84.
Wagner, R. E. (2010). Mind, society, and human action: time and knowledge
in a theory of social economy. Cheltenham, UK: Edward Elgar.
17